DANIEL BERG, EBRD Director for Serbia: Serbia Seems to be Broadly on the RightTrack

Serbia’s image as a place to do business has improved significantly and investors are continuing to look for opportunities here. All countries understand the importance of integration as the region as a whole is much bigger, and a much more valuable market than the individual countries by themselves. They, however, need funds, technical support and some external incentives to go ahead with the process. The EU approximation and the support of IFIs can be one of the important factors along the way.

Do you think that the sluggish growth of Serbia’s GDP is just a temporary effect caused by unfavorable climate conditions, or is it a serious sign that there is something wrong with the Serbian economy?

Speaking first about projections for 2017; it is still early to make a full assessment but based on the early first half figures, growth could be lower in 2017 than we and others had envisaged earlier. There are numerous factors impacting on the 2017 growth figures. For example, cold weather earlier this year and very hot weather this summer both will likely lead to lower overall agricultural output compared with a very strong performance last year.

Also, weakness in mining and associated electricity generation were surprise factors. Frontloading some planned government projects may have a positive impact on growth in the last quarter, but are not expected to offset the weak first half year and will not have significant longterm effects on growth. The poor figures in the first half of 2017 do not necessarily indicate a long-term trend. The EBRD retains a view that in the long term there is every possibility that the Serbian economy (and wages) will catch-up or “converge” with central Europe and eventually average EU levels. Higher growth and longterm convergence, however, do require further reforms to support the business environment. These include less state intervention in the economy, making state-owned enterprises more efficient and better governed as well as cutting red tape (for example, through reducing the administrative burden of inspections) and improving judicial processes. We believe this will result in higher investment and therefore jobs, exports and growth. It is also important to ensure greater economic inclusion – helping more women, more youth, more regions to contribute to Serbia’s economic growth. Some factors which have caused volatile growth performance recently also point to the importance of focusing on “resilience”, for example, converting to greater renewable sources in electricity generation or improving irrigation systems.

In the 25 years of your career, you have witnessed and assisted in transition of many countries in this part of Europe. Considering the knowledge and experience you have gained during this process, what is your view of the current reforms in Serbia and present challenges?

  • There have been important reforms implemented in the past two years. The fiscal adjustment which has been implemented with the guidance of the IMF’s three-year precautionary Stand-By Agreement has yielded results. However, more can and should be done. Despite the fiscal and budgetary successes, public debt remains high at around 70 per cent of GDP. And many large public companies remain to be restructured or privatised – a lack of reforms creates a potential threat to the country’s economic successes since they can be a drag on the fiscal resources needed elsewhere. The business environment has improved due to regulatory changes adopted since 2014 (for example, electronic permitting, improved real estate registration). But there is room for further improvements, especially in the areas of governance and institutions (for example, making judicial processes more efficient). A continued successful investment-and export-led growth strategy depends on maintaining and further strengthening the business climate improvements (both macro stability and structural reforms). Overall, Serbia seems to be broadly on the right track but faster implementation of reforms, especially if they are underpinned by a new IMF programme, would support faster convergence to EU income levels and make the country more attractive to investors.

Last year, you defined desirable qualities of market economies in the region. Which specific criteria should Serbia meet in order to have a functional market economy?

  • Serbia does have a functioning market economy. However, there are significant so-called ”transition gaps” when we compare with the “high-performing” economies. According to the EBRD’s assessment, Serbia faces the largest gaps in three areas: competitiveness, governance and resilience. How to address these gaps? In the area of governance, for example, corporate governance, both in state and private enterprises can be strengthened. Shareholders, board members and managers all should have clear roles and should be trained and empowered to work for the good of their companies. The economy can be more competitive through the inclusion of currently disadvantaged groups (for example, youth and older people, women or Roma) who can be brought into the labour force. Further improvements in the business environment, but also in the infrastructure could enhance competitiveness – I personally believe that the country should more fully utilise its river infrastructure. Finally, more reliance on renewables is desirable and we are pleased that this year the first wind farm projects are under construction. There is also a need and an opportunity to better utilise the country’s biomass and water resources. There are also both environmental and economic reasons to improve recycling and green technologies.

One global financial crisis has just ended, and yet some economy experts warn that

another one may be just around the corner. How resistant are the countries that you cooperate with to external shocks and how can EBRD help them in dealing with future challenges?

The EBRD’s countries of operations are all very different in terms of resilience and vulnerability to external shocks. That is why we attempt to tailor our interventions based on a diagnostic study assessing the abovementioned transition gaps and develop an individual strategy for each country. In the case of Serbia, our previous strategy focused on the need to develop the private sector and increase competitiveness, to bolster the banking sector (generally) and deepen financial intermediation, and to develop sustainable

and efficient public utilities. Our investment and technical assistance activities tried to tackle these issues, including through Advice for Small Business, a loan and assistance to the deposit insurance agency, continued financing and assistance for utilities such as EPS

and GSP, and key private sector investments. We do hope to expand our private sector financing further in the next strategy period as we know that private sector led growth will help ensure the economic success of Serbia.

At the Trieste Summit you promoted further regional integration. How ready are the countries in the region to do just that considering relatively frequent disputes between the CEFTA countries, and between the CEFTA countries and Croatia?

Regional integration is very important for the Western Balkans region and important steps have been taken in the transport and energy infrastructure. Most of the focus of the past 15 years has been to support north-south integration. We are now seeing increased interest in east-west integration. For example, Serbia, Montenegro and Albania can all take advantage of better connected power grids. Serbia could benefit from better access to Adriatic ports as well. Serbia’s CEFTA membership has been also very welcome. CEFTA, as earlier in the case of CEE countries, has played a significant role in facilitating cross-border trade by establishing a comprehensive free trade agreement in the Western Balkans region and replacing 32 bilateral agreements that were not mutually consistent. It also provides full liberalisation for virtually all manufacturing goods and most agricultural goods. It has also addressed the elimination of non-tariff barriers to trade between the signatory countries, the protection of intellectual property rights in accordance with international standards and the harmonisation of provisions on modern trade policy issues such as competition rules and state aid.

Serbia has been recording quite good results in terms of reducing unemployment, but, salary wise, workers in Serbia are way below their peers from CE countries. How can we bridge this gap?

In short, by raising productivity. Serbia’s productivity (value added per worker) is about one fifth of the EU average so, until this changes, Serbian producers can mainly compete with EU peers because wages are also lower. In the long run of course wages should converge to EU levels but in line with improvements in productivity. This is not a simple task and will take time. But productivity is to be improved by making the country more business-friendly, and Serbia will be able to attract investors who can bring cutting-edge technologies, innovation and training of workers. The government can take action which will make the economy more business friendly and IFIs are supporting their efforts. The EBRD’s own Investment Climate and Governance Initiative aims at some of these. For example, we are supporting the Ministry of Public Administration to carry out reforms of the inspections regime. We are helping the Ministry of Justice to introduce and strengthen alternative dispute resolution. We are assisting in improving the governance of state-owned enterprises. Meanwhile, our Advice for Small Business team is helping SMEs to become better-managed and more successful in the market. Perhaps most importantly, we are ready to team up with investors who can bring new technologies and new ways of doing business to Serbia. All these can contribute to more successful, more productive companies that can pay higher wages.

EBRD has been focusing on boosting competitiveness in public utility companies. Do you think that the management in these companies has enough will and readiness to improve their companies’ operations?

We do work with our partners to help improve governance in both private and public companies. In the public sector, we currently have significant support initiatives under way at the Deposit Insurance Agency, EPS, GSP and Komercijalna Banka. Each case is different but we generally see willingness to address governance and operational concerns. These are publicly owned utilities and there are social and political issues which emerged. Therefore, it is important to keep full support of the shareholder (that is, the state) and to maintain an open and transparent dialogue with Serbian citizens – they should understand that some short-term pain should bring long-term gains for the entire economy.

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